Posted
by
Soulskill
on Sunday February 17, 2008 @09:22AM
from the finders-keepers dept.

Reservoir Hill brings us a New York Times story about a man who will be allowed to keep the money he gained through hacking into a computer system in order to gain early access to a company's earnings statement. From the Times:
"On Oct. 17, 2007, someone hacked into a computer system that had information on an earnings announcement to be made by IMS Health a few hours later. Minutes after the breach of computer security, Mr. Dorozhko invested $41,671 in put options that would expire worthless three days later unless IMS shares plunged before that. The next morning the share price did plunge, and Mr. Dorozhko made his money by selling the puts. 'Dorozhko's alleged "stealing and trading" or "hacking and trading" does not amount to a violation' of securities laws, Judge Naomi Reice Buchwald of United States District Court ruled last month. Although he may have broken laws by stealing the information, the judge concluded, 'Dorozhko did not breach any fiduciary or similar duty "in connection with" the purchase or sale of a security.' She ordered the S.E.C. to let him have his profits."

I have some karma to burn, so I am going to go off topic / troll here.

Will whoever modded the parent a troll please share his or her logic? I will admit that it is not brilliant, so offtopic, maybe, overrated, maybe, but troll? That's just an insult. Personally, I am happy to see a first post that is not an AC "fp bitches!" and I think the effort should be rewarded.

I meta moderate about every other day, and I almost always rate the troll mods as "unfair". I don't know if this has any effect, but just so you know.

"Will whoever modded the parent a troll please share his or her logic?"

I did not/would not have modded him troll, but I can guess the simple logic at doing so.

He appears to have the all-too-common opinion that there is no such thing as a profitable but risky opportunity. I teach intro probability and decision making (among other things), and you would not believe how many people reason that, if there is uncertainty, it's "impossible" to make a good decision. The reasoning is "Well, since something bad might happen, you might end up regretting your decision." Ugh. Those are people for whom "probability", "expected value", etc., will forever remain magical, abstract terms with no application in the real world.

Before my rant goes too far off topic, back to the GP, who said:

"It is stock market after all, nobody can guarantee the outcome even with insider news."

So insider information should be ok?! After all, "there are no guarantees"?! Nonsense! And I can imagine there being at least a few mods who would consider it so obvious that this is nonsense, that they modded him troll, thinking there could be no other excuse.

See, I read it a different way altogether: the hacker was neither an employee nor a friend of an employee at the firm, and therefore [i]could not have committed insider trading[/i]. Keep in mind that the decision in question applied only to the SEC's attempt to confiscate his money for that particular crime, which he was technically unable to commit, but not to any other financial or computer crimes he may have committed. The FBI and Secret service will almost certainly find a way to confiscate everything he owns. It also does nothing to shield him from the company suing for damages related to the security breech, although they only get a crack after the agencies mentioned earlier, so there's a good chance they couldn't get anything even if they tried.

The point being that, while he clearly had solid and profitable information, he obtained it in a way that, theoretically, any outsider could have and that did not fit the definition of insider trading as currently used. He also couldn't have known if, perhaps, he had accidentally found an inaccurate draft report or if the press conference wherein the report was to be released would be delayed.

See, I read it a different way altogether: the hacker was neither an employee nor a friend of an employee at the firm, and therefore [i]could not have committed insider trading[/i].

That's how I read it too, so really the title is misleading. It's not so much that the SEC says he can keep the money (they don't have the authority to do that across the board). They're simply saying that he didn't do anything wrong that they are able deal with, so THEY won't be taking the money away. In similar news, he didn

I'm actually surprised, however, that stealing "inside information" and using it to trade is not a violation.

It may be a violation of something, but not of SEC regulations on inside trading. You see, the idea behind banning inside trading is that insiders have a fiduciary duty to the stockholders. Using inside information for their own benefit, or for that of their friends/family is putting those interests ahead of those of the stockholders and thus ignoring their duty. In this case, the "hacker" wasn

The problem is that trading on "Material Non-public Information" isn't a crime. You have to both be an insider at the company and base your trades on non-public information. The court did exactly what it's supposed to do - follow the law as it is written.

Suppose I work for large corporate X, I know that the shares will move, so I tell my mate how to crack a machine to find something to support that view, he does so & invests appropriately and if caught just says he hacked a machine.

If he were to say that I told him, them we would have the book thrown at us... but if he cracks a machine then all is OK

Oh - that's the humor of the whole story - if the system used weren't secure enough then not only he could have gained from this transaction but also a lot of others that didn't float up above the average noise level.

Anyway - see this as a lesson to either release your information fast enough to avoid anyone to take advantage or to improve the security of your data. Preferably both.

The catch with inside affairs is that at some point "knowledge" becomes "rumor" and it couldn't be certain that the data he

I think the real humor of the story is that the person hasn't been officially convicted of the crimes that would lead to insider trading. All the speculation so far is innuendo from alleged actions that haven't been resolved yet.The S.E.C. has basically attempted to delay this person's payout until those charges could be resolved and has failed. What the judge is really saying here isn't that breaking into a computer to get insider information is ok, but that you need to prove he did break into a computer a

If he were to say that I told him, them we would have the book thrown at us... but if he cracks a machine then all is OK

Negatory - the ruling is that if you do not have insider information and hack into it, you are not in breach of any fiduciary duty, and therefore not subject to the penalties that insider traders are (whom are an especially heinous group of people, and whom we particularly want to deter by excess punishment).

If a mate hacks a machine based on insider information, both the informant and the hacker are breaching a fiduciary duty. They're more likely to get useful information, and more likely to cause serious harm to the financial system. In my opinion, we want to deter hacking based on insider information more than random hacking.

That's not to say the fellow should get to keep the money. That will only serve to encourage random hacking pointedly in the absence of (traceable) insider information. However, trading on insider information should result in more significant consequences.

I'm still trying to understand how the court arrived at the determination that this is not insider trading. The hacker achieved access to information only available to a select few within the company. Possibly not known to all employees, but certainly not the general public. With that information he then abused the stock market. It does not matter to me that this individual is not an employee, he had benefit of inside information. That should constitute insider trading.Are there any lawyers in the audience

The problem with too loose a definition is then lots of people end up being considered insiders...For example, say X does Y classes for the wives of big bosses, and X might be able to tell whether the various companies are doing well or not just from observing the wives;).

Even if the husbands aren't telling the wives that their companies just had record profits, the new cars/vacation/etc they bought for their wives might reveal stuff.

Sure it's not 100%, but apparently it worked well enough for someone I kn

It does not matter to me that this individual is not an employee, he had benefit of inside information. That should constitute insider trading.

An "insider" is created when someone is entrusted with a power to access information (i.e. by being appointed a director, etc.) and that person abuses that trust for their personal benefit.

In this case, the thief was not entrusted with any power to access information, but rather exploited a technological problem in order to access information and used that information for personal benefit. He didn't breach anyone's trust. He's just stealing information.

Won could make the argument that if he broke into the system, his access to the protected informations, whether it was easy to beak in or not, placed him in a trusted position to access the trusted information thereby making the laws stick. The problem is that he has never been convicted of breaking into a computer or shown to have become entrusted to the information that supposedly helped him profit.You surely can't have X without A, B, and C in this situation. Otherwise the SEC could claim that your gains

An "insider" is created when someone is entrusted with a power to access information (i.e. by being appointed a director, etc.) and that person abuses that trust for their personal benefit.

Computer[to Hacker]: Stop! Access to information on this computer is only entrusted to a specific few. Are you one of them?Hacker: Yes, I am. Here are my credentials.Computer: Ah, yes. I am duly fooled. Access granted. Come inside and be entrusted.[User enters, is entrusted with information, later abuses

If his relationship to you were known, I imagine you'd be as likely to get busted as if you'd just handed him the information. They're not going to take your friend's word for it that he independently cracked the computer system where his buddy works, just in time to make a huge profit. And they'll probably cut him a deal to rat you out, because he's still going down for cracking the machine. But hey, give it a shot and let us know how it works out for you, when they allow you to use a computer again.

Though the cracker may be able to keep his profits, it may not be for long, depending on what other laws apply. A law may apply that prevents profiting as a result of criminal activity. He is still likely to be charged and found guilty of crimes that won't allow him to keep the money.

Indeed. The point to be taken from the ruling is not that profiting from hacking is OK. Rather the point is that profiting from hacking is not covered by insider trading laws.

Here in Melbourne Australia the hacker would probably be charged under s 82 of the Crimes Act, for obtaining financial advantage by deception, in addition to the usual charges for hacking, whatever they may be.

It's also encouraging other criminal acts, such as trespass into someone's security systems, and a violation of your employee confidentiality contractual statements.Nevertheless, insider trading is very, very common. Despite the claims at corporate seminars by policy watchdogs, by simply watching the actions of the vice presidents and board members, it's very easy to see where their knowledge of other companies from non-disclosure bound meetings is used to their personal advantage. And it's far, far too com

Someone correct me if I'm wrong, but I believe it depends strongly on your position in the company.

If you're an officer,
then you do have a fiduciary duty. If you're a run of the mill employee way down the hierarchy, then no, you do not have a fiduciary duty. Your friend can
tell anyone that you gave him a hint, but you can't be charged for insider trading (you might be fired if he talks, so make sure it's worth it:)

The judge's ruling seems pretty reasonable to me. What the hacker did was not insider trading, because he was not an insider, so the various regulations governming insider trading should have been found not to apply here.

Of course, as the judge also noted, that doesn't mean he broke any other laws. A fine equal to the profit he made on the options plus the original cost of buying them in the first place plus the cost of security work to ensure the systems are no longer vulnerable, combined with a jail sentence equal to what would have been handed down to an insider who made the same deal, seem like a fair punishment for the hacking to me.

The judge's ruling seems pretty reasonable to me. What the hacker did was not insider trading, because he was not an insider, so the various regulations governming insider trading should have been found not to apply here.

I guess a good analogy would if you broke into someones home to read their wallstreet journal and then used their phone to make a call to your broker to make a trade.

Calling a broker to make the trade isn't the sticking point, but rather you broke into someone's home.

I can't believe you passed up the opportunity to use "someone's car" instead of "someone's home" in that analogy! I actually think there's a bit more to this though, as using the information gained by breaking into the computer system to make a profit probably amounts to a crime as well as the actual act of hacking.

Of course, I don't know if there's a law related to profiting from a crime where this took place.

If he got the information from the employee or from any other fiduciary of the company, that would be considered insider-trading under the "tipper" - "tippee" theory. The tipper has to be some insider (usually an employee) who gives information to the tippee (an outsider who would normally not be subject to insider trading rules). The main requirements IIRC are that the tippee actually has to know that the information is insider (non-publicly known) info, and know that the tipper is breaching his fiduciary duty in disclosing the information. This is a form of classical insider trading, as opposed to misappropriation theory that the Gov. was probably trying to pin on the defendant in this case.

A fine equal to the profit... plus the cost of security work to ensure the systems are no longer vulnerable...

Begin bad car analogy. If I break into your car, and get caught, do I have to pay for you to have your locks replaced with higher security locks, a higher security car alarm, more durable windows, and whatever else could conceivably prevent your car from being broken into?

Somehow, this guy broke into the system, which evidently wasn't secure enough as it was. The burden of securing the system falls on the owners of the system. Is there evidence of him breaking into the system? It sounds like it, but

Sorry, I agree that my previous statement does sound overly generic now that I read it again. I didn't mean that the hacker should have to pay for completely new, higher-spec systems to improve security more generally; clearly that is the company's responsibility and should have been done anyway. I just mean the costs incurred as a direct result of this particular breach: after any successful attack, the business is going to incur costs checking out their IT systems to make sure no backdoors have been plant

Really? Question for any lawyers who read Slashdot... I've always thought that at least (1) and (2) were insider trading.Example 1: Say I'm having a cup of coffee and I see a large commercial jet. One of the engines explodes and the plane crashes. I immediately get on my laptop and buy as many put options on the airline's stock as possible before the TV networks find out about it. Is this insider trading?

Example 2: A high level employee of a corporation has a loud cellphone conversation in the seat n

Well, I'm neither a lawyer nor an accountant, so I can't comment on any professional definition of "insider trading" that may exist, only the lay man's usage of the term. That said, I'd say your examples are all pretty clear, at least from an ethical/common sense perspective.

In (1), an aircraft crashing is clearly public information, and acting because you hear public information first isn't against the rules. (If it were, why would all the traders have news feeds running all the time?)

In this case, the SEC needs to prove the guy did steal the insider information.

No, that is not in question, from TFA;

"Dorozhko's alleged 'stealing and trading' or 'hacking and trading' does not amount to a violation" of securities laws, Judge Naomi Reice Buchwald of United States District Court ruled last month. Although he may have broken laws by stealing the information, the judge concluded, "Dorozhko did not breach any fiduciary or similar duty 'in connection with' the purchase or sale of a security." She ordered the S.E.C. to let him have his profits.

This is more of a case of rigid interpretation of the law; the SEC rules don't explicitly say that you can't steal and use insider information so it's not illegal.

Also this guy lives in the Ukraine so this is probably the only punishment [blocking receipt of the money] that the US could possibly give him.

He *may* get to keep it. Basically what has happened is that the courts have ruled that the SEC can't take away his money, because what he did isn't insider trading. Remember that the SEC just regulates stock trading. So since this isn't insider trading, they don't have the authority to seize his funds.

However, he still could lose them. If the government tries and convicts him of a crime for actually hacking in to the system, then the money can be taken. You aren't allowed to profit from crimes, and as such the government can seize assets you gained through crime. So, if they manage to convict him of breaking in to the systems, the money he made in the trades will be fair game since it was a result of the break in.

However at this time he's not been charged, so that isn't on the table yet. However that doesn't mean this ruling says you get to keep your money no matter what in a case like this. It just means that it doesn't quality as insider trading so the SEC can't take it.

A similar case would be something like robbing a bank and then using the money to make more in the stock market. Even though the money was stolen, it isn't a violation of securities laws, so the SEC couldn't take it from you. However if you get convicted of robbery, the court could then seize the profits you got from that crime.

exactly, although if they had a case against him for hacking, it would seem they would have used that already as a slam-dunk case. I think you have a situation where they "know" you stole money from the bank, but didn't have proper guards, or even accounting to PROVE you stole the money within a reasonable time... just that it came up missing and you happen to have it. If that happened at a bank the managers would be fried... in a company SOX is supposed to ensure you implement these policies for computer

exactly, although if they had a case against him for hacking, it would seem they would have used that already as a slam-dunk case.

I would really like to hear the details of "hack" - sounds like it might have been one of those where he just twiddled the URL based on the format of already "public" URLs. IMO, that should not count as illegal hacking, its so trivial, obvious and common practice.

I don't see how that makes any difference. It's well known that the locks on my house are easy to bypass. I even saw them doing it on the news the other day (not my house, but the same locks). Yes, analogies suck.

The reason that analogy sucks is that locks are actively put in place for a purpose. URL twiddling is a lot more like being in a room with only half the lights on and you shining your own flashlight into a dark corner.

I'm sorry, but the equivalent is not like robbing a bank and investing the money. The equivalent is an insider placing options trades on information learned before the public knew. The only difference in this case between the CEO or CFO of a company making the options trades and Oleksandr Dorozhko is that he gained this insider information illegally.

According to TFA, the legal question raised is whether or not he "deceived" the computer when he hacked into it and downloaded the quarterly report. The spir

So, if they manage to convict him of breaking in to the systems, the money he made in the trades will be fair game since it was a result of the break in.

Not exactly. The money he made in the trades was a result of his making an independent act based on information he learned during the break in. There's no direct cause and effect there, since there's an intervening act of free will (he made a stock trade). This is entirely different from a bank robbery, where the money is stolen without an intervening a

Umm... except that he's UKRAINIAN. Did anyone read the whole article? The DoJ isn't pursuing him because they perceive it to be fairly difficult to extradite from ex-Soviet bloc nations, especially on a hacking charge. Russian & Ukrainian crackers are frequently ID's violating US electronic theft and data tampering laws (mostly because we make it so easy for them, but, I suspect also because they make so much money doing it), and have been notoriously hard to prosecute. So, good luck on that one.I'm thi

While not insider trading, this person has presumably broken other laws. The government should have prosecuted him under the laws that covered his actions, and not the laws they would like to cover his actions. If those laws are insufficient they should try and fix the laws, not prosecute him for breaking laws he hasn't.

I'd venture the company he stole info from didn't have proper security logs, didn't maintain them, etc. so they aren't presentable in court or they'd have thrown the book at him already. Like a bank that erased the security footage and let the cleaning crew polish away the fingerprints before counting the money to find it missing.... if the wronged party destroyed the evidence, however unknowingly, they just lost their own case.

Seriously, all share trading works on the basis of one party thinking they know something that either makes a stock worth selling or worth buying. When they are right they make a profit and when wrong they make a loss.

If you don't have any privileged (either by insider or through your own analysis) information, you're effectively just making a bet - you might as well buy a lottery ticket.

You are wrong. You do not have to be different or have different knowledge from others. Buying GOOG stock early or investing in stocks that pay good dividends are examples of decisions that are made based on public info- there is plenty of money that can be made using normal, publicly available information. Investing in penny stocks and day-trading are completely different issues of course.

Well, dividend-paying stocks give you a regular return - As long as you feel fairly confident
that the company won't go under, you'll make a hell of a lot more than you would leaving the
money in your savings account (and if you chose well and occasionally reallocate your portfolio,
without requiring otherwise-unknown data, you can do a good bit better than a CD or even
investment-grade bonds.

If, in a recession, you short the same (and again, ETFs exist that will let you do that without the hassle and risk of actually holding a short position), you will make money, on average.

It's slightly OT but by mentioning the ability to "short" via ETFs, you should also point out to/. readers that these ETFs do not necessarily give you the equivalent of a short position, especially the "ultra-short" ETFs. For instance, SDS (Proshares Ultrashort S&P 500) gained 2.49% this past month versus a 1.69% loss

Stocks have historically earned an average annual return of somewhere around 9%. Lotteries, on average, have a return around negative 50%.

It's a risk/reward thing. You could put it in a savings account or a U.S. Government Bond with near-absolute safety (you will never lose anything) and get, say 3%. Or, you can boost your expected return over time by taking on some risk. With rational investments, the more risk you take, the greater the expected return over time.

"Mr. Dorozhko invested $41,671 in put options that would expire worthless three days later unless IMS shares plunged before that. The next morning the share price did plunge, and Mr. Dorozhko made his money by selling the puts."

I don't understand this. He was buying, waiting for the share price to plunge, and then selling. Doesn't that mean he was selling lower than he bought? How did he make money?

He bought options, specifically puts, which are options to sell at a specified price called the strike. Suppose a stock is trading around $10. If I buy puts with a stike of $7.50, and the stock falls to $5, then I can buy stock at $5 and exercise my puts to sell at $7.50, netting a profit of $2.50/share.

He was not buying the shares, he way buying put options, which basically give you the right to sell ("put") the shares at a predetermined price. If the share price suddenly drops, you can make money by just buying the shares on the open market and exercising your put options (which give you a fixed selling price that is now higher than what you're paying for the shares on the stock market). Alternatively, you can just sell the options themselves, which is less of a hassle.

He bought put options. That means he essentially bought a contract to sell someone stock at a certain price at a later date.
Say that the price of the stock was $100, he buys a put option to sell 100 shares at $90 apiece. If the put option expires and the price is >= $90, then he loses money, because he now has to buy the stock for the "seller" of the put option for more than he payed for the contract. If the price goes down to say $50 a share though, he received $9000 for the contract, and only has to p

From wikipedia: A put option (sometimes simply called a "put") is a financial contract between two parties, the buyer and the writer (seller) of the option. The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.He

Stock A is currently selling for $100 per share. A trader a couple of months ago felt confident that the stock would never drop below $80 per share, so he sold put options - guarantees that he would buy the stock from you at a given price - in this case $80 - for a given date. If the price of the stock remains at $100/share, the options will be worthless, because owning shares valued at $100 there's no way I will sell them for $80. However, if the stock price drops to $60, I'd be more than happy to sell for $80/share. The person selling the options has no choice - if I come to him with the contract, he has to buy them at $80/share.

Those options can be traded up to the exercise date. So I buy them three days before the exercise date at a low price, as no one expects the stock to drop that much - the options themselves are worthless. I know the stock will plummet; I buy up all the options I can afford - let's say a buck a pop. Stock price is $60, suddenly those options are worth $20 apiece - difference between the market price and what the trader is obligated to pay.

To reduce your description a little further:Trader A: I will pay the holder of this option $80/share, if you present the option to me before the 1st of January.... time passes...Trader B: It's the 28th of December, and the share price is still $100/share, this option is worthless.Trader C: Hey, I like worthless things, I'll pay you $1/share to take those options off your hands....30th of December...Company: Uh oh, we tanked.Trader B: ARGH! Who will buy this junk stock, going cheap, $20/share!Trader C: He

That this is actually quite appropriate. Since he didn't have any fiduciary duty, the SEC shouldn't take his money away. That said, since it's profit from an illegal act, I would hope that the money would be taken away -- if and when he is convicted for the crime of stealing the data.

Too often in this country we seem to be throwing every law available at people and making up new ones to go with them, when the acts we're trying to punish are already illegal. If he didn't break securities laws, he shouldn't be punished under them. Since he did (we assume, but it hasn't yet been proven) break unauthorized access laws, he should be punished under those.

We don't need more laws against things that are already illegal, and we don't need to make a mockery of existing laws by applying them to things they don't apply to. On a related note, why do we need separate "identity theft" and "atm card fraud" laws, when anyone being charged with them is already also being charged with uttering false instruments and fraud? Our legal code needs to be smaller and simpler; making it so would make it more effective and efficient, not less.

I know the article makes it seem like he got away with it. Far from it.There are only 2 situations here:

1) He had legal access to the documents. If true, that is insider trading. The SEC is the proper governing body and they will punish him.2) He did not have legal access to the documents and stole them through whatever means he used to do so. If true, then he will also be punished, but by prosecution in a criminal court. Upon conviction, the money will be confiscated.

Actually, you missed one. The person has legal access to documents because they are publically available.

If I'm right, I think this was a person guessing the file-name of a press release when it was uploaded to a public server when the main page didn't contain a reference to the release. If so, it would make it more difficult to make a criminal conviction - based on sites such as Notpron [deathball.net], I doubt URL rewriting is much of an issue.

This is just a botched prosecution, not a decision with major implications. The attacker is a Ukrainian resident. He could have been prosecuted under some computer crime statute, but that would require investigative resources and cooperation from the State Department and the government of Ukraine.
An "insider trading" case probably looked easier to some lawyer at Justice,
even though this is clearly "outsider trading". They didn't expect that an admitted criminal would actively contest a seizure of the m

So a judge let him have his ill-gotten gains. He still broke into computer systems to gain the information he used in this exploit. What's to stop a criminal judge from prosecuting him for that, sending him to jail, and fining him all the profits he made on this plus what he invested in the first place plus some on top of that to drive the point home?

Yes, the prosecutors messed up. They charged him with insider trading, which has a very specific definition under the law [sec.gov]. In this case the guy doesn't meet any of the requirements to be an insider under the rules. What got him off is probably that he had no help from anyone who was an insider. That's actually a deliberate "loophole" in the law so that, for example, if the CFO is dumb and leaves a copy of his company's next quarterly report on the table at a restaurant a week before it's due to be published

Same thing happened many years ago in a case called Chiarella, the low-tech version of this case. A printer was stealing corporate information and trading on it. The court found him not guilty based on the same statute. Congress did nothing. Who can blame them? They're busy doing important stuff like investigating the Patriots and asking Roger Clemens if he's a vegan.